Korea’s expected inflation at 14-month low in July

[Photo by Yonhap]

South Korean consumers’ expected inflation for the following year hit a 14-month low in July in line with a downward trend in consumer prices, a central bank survey showed Wednesday.

According to data released by the Bank of Korea (BOK), consumers’ expected inflation for the following year in July stood at 3.3 percent, down 0.2 percentage point from 3.5 percent in June. It is the lowest level since May last year when the reading was 3.3 percent.

The BOK survey was conducted between July 11 and 18 on 2,500 households nationwide.

The expected inflation rate, which is a forecast of consumer price inflation over the following year, has been on a decline for three consecutive months, starting from 4.0 percent in February, 3.9 percent in March, 3.7 percent in April, 3.5 percent in May before holding steady at 3.5 percent in June.

“The drop in the consumer price index (CPI) to the 2 percent range had the biggest impact,” said Hwang Hee-jin, head of the statistics team at the BOK. “It remains to be seen whether the downward trend will continue due to the expected increase in utility bills in the second half of the year and the rise in agricultural prices due to heavy rains.”

While inflation continued to slow, consumers’ perception on the economy as a whole continued to improve amid expectations of an economic recovery.

In July, the composite consumer sentiment index (CCSI) stood at 103.2, up 2.5 points from 100.7 in June. This is the fifth consecutive month of increase and the second straight month above 100 after the reading exceeded 100 for the first time in 13 months last month.

The CCSI factors in six major individual indices - current living conditions, future living conditions outlook, household income outlook, consumer spending outlook, current economic assessment, and future economic outlook - among the 15 indices that comprise the consumer sentiment index (CSI). If the index is higher than 100, it means optimists outnumber pessimists and vice versa if it is below 100.

Compared to June, five of the six indices that make up the CCSI increased except for consumer spending outlook.

Both current economic assessment and future economic outlook rose by 6 points to 75 and 84, respectively, while current living conditions rose by 2 points to 91. Future living conditions outlook and household income outlook each gained by 1 point to 94 and 99, while consumer spending outlook was unchanged at 113 from the previous month.

“The increase was driven by the ongoing slowdown in inflation, a moderate recovery in consumption, and expectations of an easing in export sluggishness,” said Hwang.

The interest rate outlook index rose 7 points over the month to 112 from 105. This index rises above 100 when more people expect interest rates to rise in six months than those expecting a decline. The sharp rise in the index indicates a significant increase in the proportion of people anticipating interest rate hikes over the past month.

“Although the BOK has kept its benchmark interest rate unchanged for four consecutive times, the surge in the index is due to the expectations of continued high interest rates influenced by the possibility of further rate hikes in the U.S. and the upward trend in market interest rates,” said Hwang.

The housing price outlook index rose 2 points to 102. This means that the proportion of consumers expecting house prices to rise in a year’s time is greater than the proportion expecting a decrease. The index has risen for eight consecutive months after falling to a record low of 61 in November last year.

“Expectations of a housing market recovery have increased as the volume of housing transactions across the country has increased and the price decline has continued to slow,” said Hwang. “But it remains to be seen whether the overall upward trend will continue as there are still regional disparities and lending rates have recently increased.”